Equilibrium (MKM C7/160-2)
Equilibrium is a condition which once achieved will
continue indefinitely unless one of the variables is
7th Ed Fig. 3.7
Fig. 4.8). In the case of
markets, the equilibrium price 'clears' the market, that is the quantity
demanded by consumers equals the quantity supplied by producers. More generally, economic theory recognizes
four general types
general equilibrium: a condition that
exists in an entire economy given perfect competition in all industries.
It is a static state where all
prices are at their lowest long run average cost per unit, individuals spend
maximizing their satisfaction, demand for and supply of factors of production
(Capital, Labour, Natural Resources) is also in equilibrium with all factors
earning their opportunity cost
- stable equilibrium:
a condition once achieved continues indefinitely
in a variable followed by reestablishment of the equilibrium. Example: ball resting at the bottom of a cup; shake it,
stop and the ball
returns to the bottom;
- unstable equilibrium:
a condition once achieved continues indefinitely with changes
in a variable not followed by reestablishment of the equilibrium.
Example: ball resting on the top of an overturned cup - shake it and the ball
falls off never to return; and,
iv - multiple equilibria: a condition that exists in an entire
economy with several points of stable equilibria but only one being
optimal with respect to growth of the economy.
For purposes of
this course only (ii) stable equilibrium will be examined.
is the sensitivity of
one variable to a change in another variable.
the constant slope of a straight line is measured ΔY/ΔX or rise over run,
Elasticity varies even along a straight line (P&B 7th Ed
It is measured (ΔY2-Y1/Y1)/(ΔX2-X1/X1)
i.e., the change in Y divided by the change in X.
Economic theory recognizes three principal types of elasticity:
i - income elasticity
with price constant, the change in demand caused by a change in income
- price elasticity -
the change in demand or supply caused by a change in price (P&B
Fig. 5.8; 7th Ed
Fig 4.3; R&L
Fig. 4-2 &
MKM Fig's 5.1
MKM Fig. 5.5
MKM Fig. 5.6).
- elasticity of substitution or cross-elasticity
- either (a) the change in demand for a factor of production (Capital) caused by
a change in the price of another factor (Labour); or, (b) the change in the
demand for one commodity (hamburgers) caused by a change in price of a competing
or substitute commodity (pizza)
7th Ed Fig.4.6).
In all three types
elasticity may be:
greater than one
(elastic) - a near horizontal demand or supply curve where a small
increase in price causes a large change in demand or supply;
equal to one
(unitary elasticity); or,
less than one (inelastic) - a near
vertical demand or supply curve where a large change in price causes
little change in
demand or supply.
As will be seen,
Elasticity places a critical part in choices of consumers and producers.